Category Archives: Economics

Soros’ Misunderstanding of Financial Markets

I don’t have anything to add to what Gerard Jackson wrote about George Soros.

Soros revealed the source of his confusion and ignorance when he admitted that his experience of money markets led him to his present views. (I knew it couldn’t have been serious study). This apparent revelation leads him to merely parrot the old cry that financial markets are inherently unstable, leading to breakdowns and depressions. And that this instability led to the evolution of central banks. Yet, according to him, free market “ideologues” (how lefties love that word) argue that it was faulty regulations, not markets, that were really responsible.

Markets are basically stable. What is not stable is monetary policy. And it is faulty monetary policies that destabilise economies. When the gold standard reigned supreme financial markets never witnessed the kind of prolonged financial gyrations that we are now experiencing. These wild fluctuations are basically caused by constant changes, and anticipated changes, in money supplies, price levels and exchange rates.

Read the whole thing to learn a bit about the Austrian School of Economics that Ron Paul began to popularize this Republican primary season.

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Hedge Fund Liar Makes $2.9 Billion, says economy is in crisis

How can this be? The truth is that every change in the economy is good for someone and bad for someone else. Increased production, however, which Democrats and their Green buddies are against because of their irrational global warming obsession, lifts up everybody at the same time. What is the solution Soros proposes for the troubles he sees? More progressive and socialist agitation validated by the increasingly feckless (ref. meaning 2) Democratic Party, which he has bought and paid for with his billions. The only way to stop the dollar from plummeting is to stop printing so much money. This would require raising government interest rates and cutting government spending. In order for these changes to not plunge the US and world into a new depression, tax rates would also need to be reduced to minimal levels and bad rules and laws like Sarbanes-Oxley and the Americans with Disabilities act need to be repealed or drastically revised.

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Deflation and the Upcoming Economic Problems

The US economy is not ready to collapse… yet. But it looks bad. It looks like big economic problems are in the future for the USA (and everyone else, since the dollar is the world’s reserve currency). Here are some of the more interesting articles around.

The deflation time-bomb, by Mike Whitney
Whitney predicts a depression with the sub-prime mortgage collapse spreading to all mortgages and then to all credit, resulting in a rash of foreclosures, bankruptcies, and bank failures. He hints at the cause when he says the currency deflation will only be stopped by refusal of lenders to lend and borrowers to borrow, or by a sell-of of the dollar. He doesn’t really say why it is happening, other than blaming Bush, or how to make the best of it when it comes.

If deflation is the problem, and I think it is, then it didn’t start with Bush. It started with Reagan and has only gotten worse ever since. Even Clinton with his “surplus” only ran a surplus if you completely ignore the debt the USA was racking up for Social Security and Medicare at the same time.


CDS: Phantom Menace, by Hellasious (Hell as IOU’s)

Credit Default swaps (CDS) allow hedgers and speculators to bet on credit events (like defaults, etc) by big borrowers (governments, large cap corporations, or big funds). They are a form of insurance that is completely unregulated. They are a craps game with hedge funds and speculators (mostly speculators) betting on derivatives and indices and other stuff. Lots of speculators are about to lose their shirts, because as of the second half of 2007 the combined value of all the CDSs is up to about $45 trillion. That is three times the USA’s GDP and over twice the capitalization of the entire US stock market. It is nearly as large as the total amount of debt outstanding in the entire world, and might exceed the total amount of debt worth buying. The speculators who are lending on these CDS instruments are highly leveraged (approaching zero margin), and if their CDSs go bad they will lose the whole leveraged value, not merely their investment. Hellasious explains:

But selling a CDS requires zero margin and even produces immediate and regular income from payments received for underwriting the credit insurance. Theoretically the sellers should maintain adequate reserves on their balance sheets to cover their credit risk exposure, but does anyone believe that hedge funds and traders actually do? Not a chance… The result is a highly volatile equity exposure, carried at zero margin in a completely unregulated over the counter market. Recipe for disaster? You bet…

Not only that: CDSs create these infinitely leveraged equity positions out of thin air. Unlike options, single stock futures or other equity derivatives that require the delivery of actual securities at settlement, CDSs do not. They are pure bubble-air and can be created regardless of the amount that is outstanding in the underlying securities.

Government-Industrial Complex, by the Wall Street Examiner
This article points directly at motive:

Businessman enters politics via the candidacy or contributor route. Politican gets elected and appoints his contributors and supporters to key governmental or advisory positions. Politician leaves office with a plush gig to make up for the years of meager earnings.

Even Tony Blair, labor leader, has joined the post-elective-office gravy train working for JP Morgan/Chase.

The Bernanke Paradox And How To Overcome It, by Hellasious
Hellasious is back with what he thinks is the likely failure mode for the economy, that US consumers stop spending money even at a nearly zero percent interest rate. His solution is more and better jobs in a government-targeted industry. Energy and environmental mitigation are Hellasious’ preferences. I certainly agree on energy, and agree again on a massive energy project of even greater scope than the Manhattan or Apollo projects, with tax and other incentives for private companies to build the infrastructure for the new sources of energy. An energy project of heroic scale is needed. However, it is not the answer to the deflation-caused depression that looms in the future.

More government spending is not the answer to deflation that was caused by uncontrolled government spending and loose money. Abolishing Income and Corporate Tax and instituting a Fair Tax might actually get rid of a lot of the perverse incentives that have led the economy into its present straits. Maybe a solution to the insolvency of Social Security and other government wealth transfer programs could follow. But that is a really radical answer.

Still, it is not as radical as the current course, which appears to be to stabilize US incomes at the same level as Chinese or Mexican incomes. That’d solve the illegal immigration problem! Chinese incomes are in the $.50 an hour range, and the US minimum wage is almost $6, twelve times as much.

The US has a long way to fall to reach parity with China or Mexico. That would be a collapse!

Radical solutions are to be preferred to that.

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Swallowing Swords

Hans Rosling gave a brilliant statistical talk in 2006 and another in 2007 that both exploded a lot of myths about the first and third world. Conclusion: The first and third world that were very distinct in 1950 have converged in 2007 with the exception of Africa and a few other exceptionally poorly managed countries. The 2007 talk also features visual proof that the impossible really isn’t, when an academic statistician swallows a bayonet.

Related

TED: Inspired talks by the world’s greatest thinkers and doers

Gapminder: Free software to help visualize human development

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The Upcoming Economic Collapse(s)

Economic Collapse seems to be a popular meme in the media and blogosphere. While there is no market for predictions of economic collapse on the idle Prediction Market, there should be.

Lyndon LaRouche has been talking about the upcoming economic collapse of the United States for a few years. Mike Whitney of the leftist electronic fish-wrapper Counterpunch agrees. Conveniently, Whitney interprets VP Dick Cheney’s conservative investment strategy, entirely congruent with both his age and legal requirements that the VP of the USA not take any active stock positions while serving, as a conspiratorial bet on economic collapse.

While I, like many, am unhappy with the US government policies that have been weakening the dollar for the past number of years, I believe that there is at least an argument in favor of these policies. The argument being that a weaker dollar will make US products more affordable on the world market. Of course, the missing piece to this argument is the requirement that there be sufficient US manufacturing to create the products.

Still, certain elements on the far left were saying the same thing about the US under Bill Clinton 13 years ago. I guess he wasn’t leftist enough for them.

How about Venezuela, land of the new anti-kulak campaigns, and its economic woes? For leftist commentary exorcising a country’s economy from signs of imminent collapse, we only have to look at this apologetic website for Fidel Chavez, I mean Hugo Castro, I mean Hugo Chavez. In 2002, even the formidable, reliably pro-socialist BBC reported that Venezuela’s economy was in a bad way. More recently, Bloomberg reports that the Venezuelan and Ecuadoran economies are the shakiest in South America. Here Bloomberg describes how Venezuela’s central bank is doing everything it can to slow inflation from last year’s 19.5% to 12%, which is low for Venezuela. OK, the US had similarly high interest rates and equally high unemployment back in the stagflation days of Jimmy Carter, but it took Ronald Reagan’s policies of (military) government spending and tax rate decreases to shake the country out of its Carterista malaise. Does anybody see Hurricane Hugo doing something like this in the misty depths of their crystal ball?

Me neither.

Iran isn’t doing well. Thomas P. M. Barnett has a brief article about Iran’s economic troubles. Inflation is running around 12%, and exports are doing well because of oil and petrochemicals, which made up 87% of exports in 2004. Oil-exporting Iran is expected to go into a trade deficit by 2008. OK, so Iran is probably not going to collapse in the next six months. But it’s poised for a popular uprising of some sort.

Gaza, a.k.a. Hamastan, a.k.a. Fatahstan, not only is already in a state of economic and societal self-cannibalization, but the lunatics are running the asylum. It is the first suicide-bomb-state, having a terminal case of the jihads that will cause death by hemorrage. And quick. But we hear nothing about Gaza from the usual suspects, except that it’s all the Jews’ fault.

How about Zimbabwe? A leaked (unsourced) aid group estimate predicts that Zimbabwe’s economy will collapse within six months at the most. Zimbabwe’s current inflation rate stands at 3,714%, with prices doubling every two weeks. Projecting out to the end of 2007 gives an inflation rate of 512,000%. To put that in layman’s language, 5,120 Zimbabwean dollars at the beginning of the year would have the purchasing power that one Zimbabwean dollar had at the end of the year. Imagine convincing your boss that your pay needs to be doubled every two weeks and you will start to understand what this means to the unfortunates trapped inside Marxist-thug Mugabe’s miserable command economy.

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On the Creation of Wealth

Wealth really isn’t all that hard to understand.

A person’s Wealth is measured by what other people are willing to give him to purchase everything he owns.

It’s nice to have cash, since its value is guaranteed by the government. The Wealth value of other possessions is not quite so reliable. Total Wealth is measured by what everyone is willing to pay to own everything that can be owned.

Manufacturing or agriculture is the way that wealth is created (as measured by the value of human property) as opposed to transferring it (like doctors and lawyers do).

Though in an ideal world, everyone would agree with me and this note would already be over, it is possible that the reader may be skeptical of this claim. Let us consider an example of a small manufacturer.

Consider a guitarist and budding luthier, who has made several electric guitars from hardwoods, hardware, and electronics. Some of his friends and acquaintances have begged him for guitars of their own, and he has accepted a commission to make a $1,000 guitar for someone.

  1. At process beginning, he obtains $200 worth of hardwoods, hardware, and electronics.
  2. He already has $1,000 in tools to shape and finish the guitar and install the electronic parts.
  3. Finally, he sells the guitar for $1,000.

The value of everything at the process beginning is $1,200. At the process end the value is $2,000. The increase in value, or profit, is $800. The process is repeatable. Each guitar continues to be worth $1,000 after being sold, so the person who buys it has just as much wealth after the transaction as before, while the luthier has the created wealth as a reward for his hard work and taking a risk on selling the product of his work. $800 of wealth was created by the process. This is the process by which all manufacturing, not just the manufacture of guitars, produces wealth. Agriculture works the same way as manufacturing.

If our luthier produces enough guitars to sell two guitars per week that’s a gross annual profit of $83,200. After accounting for taxes, tool replacements, and the various penalties for self employment his will be the equivalent of a $40-50,000 salary. If he wants to make more at the end of the year he reinvests his income in an expanded workshop with an attached high-end-boutique-store and hires employees to follow his system of manufacture and sales. The more efficient the system is, the more money there is for everybody including employees and business owner, and the better the product that is available to customers.

The way to get customers into his boutique business is to do something simple like teaching, painting guitars for people, upgrading pickups, repairing worn out fretboards and replacing old tuning machines. That’s how advertising works, as a way to get the business’ name to people.

Compare manufacturing to a medical clinic.

  1. At process beginning, the customer walks into the medical clinic.
  2. The doctor at the clinic uses $500,000 worth of equipment to perform some tests on the customer.
  3. Finally, the customer leaves after paying $500 to the medical clinic for his test.

The value of everything in the process at its beginning is $500,000 and it is the same at the end. The customer simply pays the $500 fee for the privilege of getting a use of the equipment and the doctor’s training. No wealth was created. Wealth was transferred from the customer to the clinic, where it will tend to accumulate.

The way that wealth will be created from the clinic is when the clinic purchases more manufactured equipment.

The proportion of manufacturing in an economy will determine the amount of growth built into the economy. Economies dominated by services tend to be stagnant. If an economy grows, then everybody who is part of it becomes more wealthy. If an economy is stagnant, then the economy tends to fracture, with high status occupations such as doctors and lawyers getting richer and lower status occupations getting poorer. The engine of the economy that evens wealth by bringing the level of wealth up, is manufacturing and agriculture.

As misbegotten government programs, product safety lawsuits, and NIMBY lawsuits drive manufacturing out of America, so shall the economy stagnate. If you want to see which country will become the next superpower standing astride the world girded in impregnable armor and wielding its terrible swift sword, look to the economy that focuses all its efforts on agriculture and manufacturing.

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On Corporate Taxation

Why increase taxes on corporations? Those who believe corporate taxes should be increased believe they are “sticking it to the man” by increasing the taxes on “the man’s” company. But what actually happens? Is “the man” the one who pays, or do the costs of extra taxes get shifted to others?

Here is what happens when taxes or bureaucratic requirements on corporations increase.

  1. Some companies will engage in shady tax avoidance schemes. Others will lobby for preferential tax treatment, corrupting the legislature with money and making tax laws more complex and unfair, and further encouraging lawbreaking by means of bad laws.
  2. Usually, if a company’s taxes increase, the company raises prices. Therefore the customers of the company spend more.
  3. If a company can’t raise prices to cover the additional taxes, it will cut expenses by reducing the employer contribution to worker IRAs or 401Ks, and by cutting medical and other benefits.
  4. If the company needs to further cut expenses, it may lower its dividend, thereby damaging its stock price, which hits the retirement accounts of company employees and others.
  5. If a company can’t raise prices and cut expenses enough, it will further cut expenses by firing middle-class employees, or by going to cheaper, non-US suppliers.
  6. If firing employees doesn’t make enough of a difference, the company moves to another country with a more favorable tax structure and fires US employees and US suppliers
  7. If the corporation is operating on the edge already, it may simply go out of business, firing everybody and ceasing to pay taxes entirely.
  8. Finally, it is possible (but highly unlikely except in the fantasy worlds inhabited by leftists who still have not understood that Marxist/Leninist systems are always inhuman, cruel, murderous and evil) that corporate officers and board will cut their own draw or pay.

No matter what level of taxation exists, these are the results. Taxation of productive companies reduces the number of jobs and the prosperity of stockholders and productive workers in a nation, and it enriches the government bureaucracy.

h/t: Dennis Prager.

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